--- title: Salary Reduction Simplified Employee Pension (SARSEP) Plan description: Learn about what a SARSEP is, its requirements, contribution limits, advantages, disadvantages, the plan termination procedure, and who can participate. image: https://www.carboncollectiveinvesting.com/hubfs/Salary_Reduction_Simplified_Employee_Pension_(SARSEP)_Plan_-_FI.png --- [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo-white.4f6047d4.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/401k) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo.53b28bee.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) **[Home](https://www.carboncollectiveinvesting.com/) > [B2B 401k](https://www.carboncollectiveinvesting.com/401k) >** Salary Reduction Simplified Employee Pension (SARSEP) Plan # Salary Reduction Simplified Employee Pension (SARSEP) Plan ![](https://www.carboncollectiveinvesting.com/hubfs/zach-stein.jpeg) Written by Zach Stein | Reviewed by [Subject Matter Experts](https://www.carboncollectiveinvesting.com/subject-matter-experts) Updated on October 1, 2024 Fact Checked Why Trust Carbon Collective? ### Table of Contents ## **What Is a SARSEP Plan?** A SARSEP is a salary reduction plan that allows small businesses to make contributions on behalf of their employees. It is a pre-1997 simplified employee pension (SEP) plan that involves a salary reduction mechanism. Employees can elect to have their employer contribute a portion of their wages to an Individual Retirement Account or Annuity (IRA) established under the SARSEP (a SEP-IRA). After 1996, a SARSEP could not be formed. However, for SARSEPs established before 1997, eligible workers hired after 1996 must be permitted to participate. [![Book a free 401(k) Strategy Call.](https://hubspot-no-cache-na2-prod.s3.amazonaws.com/cta/default/20345524/c0b11393-9252-4109-aec5-52bc11133d47.png)](https://hubspot-cta-redirect-na2-prod.s3.amazonaws.com/cta/redirect/20345524/c0b11393-9252-4109-aec5-52bc11133d47) SARSEP plans, like SIMPLE IRAs, are intended for small enterprises with less than 100 employees. Despite their limited advantages, these plans are still employed by certain small enterprises. ## **SARSEP Requirements** Two sorts of documentation were necessary to establish a SARSEP. The SARSEP plan itself, as well as the SEP-IRA account for each SARSEP participant. A SARSEP plan was developed using either IRS Form 5305A-SEP or an IRS-approved prototype SARSEP. SEP-IRAs are established for each employee with banks, insurance companies, or other qualifying financial institutions using IRS Form 5305 PDF, Form 5305-A PDF, or an IRS-approved prototype IRA. Below is more information about the other forms that need to be filed in connection to SARSEPs. ### **Form 5500** Unlike other eligible retirement plans, SARSEPs are not required to file Form 5500, Annual Return/Report of Employee Benefit Plan.  SARSEPs are exempt from the Department of Labor's reporting and disclosure requirements if the employer meets certain employee notification criteria and does not place investment limits on funds donated to workers' SEP-IRAs. ### **Form W-2 Reporting** Do not include employees' voluntary deferrals in the Wages, tips, and other remuneration boxes. However, they must be included in the Social Security and Medicare wage and tip boxes.  Box 12 must also include them. Box 13 must have the Retirement plan box ticked. ### **General Reporting Obligations** In addition to the above-mentioned employee notification criteria, the bank, insurance company, or other trustee or issuer of SEP-IRAs must meet the following general reporting requirements: 1. To record contributions to a SEP-IRA, the trustee or issuer must file [Form 5498,](https://www.irs.gov/pub/irs-pdf/f5498.pdf) IRA Contribution Information, with the IRS. Each SARSEP participant must submit a separate Form 5498. Participants must also be given this form or another statement of fair market value and account activity. 2. [Form 1099-R](https://www.irs.gov/pub/irs-pdf/f1099r.pdf), Payouts From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, and Other Financial Instruments, is used to record SEP-IRA distributions.  Payouts from a SEP-IRA are subject to the same withholding requirements as regular IRA distributions. ## **Who Can Participate?** An eligible employee is a person (including a self-employed person) who satisfies all of the following requirements: - Has attained the age of 21 - Has spent at least three of the past five years working for the firm - During the year, received at least $650 in pay from the company for 2022 or $750 in pay for 2023.   Employers may impose less stringent participation requirements than those mentioned, but not more stringent ones. The following employees may be excluded from a SEP or SARSEP by their employer: - Employees who are covered by a collective bargaining agreement whose retirement benefits were negotiated in good faith by the employees' union and the employer - Employees who are nonresident foreigners who do not receive wages, salaries, or another recompense for personal services in the United States ## **Contribution Limits** The annual contribution ceiling is $20,500 in 2022, with a catch-up provision allowing individuals over 50 to contribute an extra $6,500 in 2022. In 2023, the contribution limit is $22,500, with a catch-up contribution of $7,500. Employers may make SEP contributions that cannot exceed 25% of the employee's salary or  $61,000 in 2022 ($66,000 in 2023). ## **Plan Termination** If you feel that your SARSEP is no longer a good fit for your company, talk to your financial institution partner to see if another retirement plan might be a better fit. To end a SARSEP, tell the SARSEP financial institution that you will no longer be contributing and that you wish to terminate your contract or agreement. You must also advise your staff that the SARSEP has been stopped. You are not required to notify the IRS that the SARSEP has been discontinued. ## **Advantages of SARSEP Plans** The advantages of a SARSEP include the following: SARSEP plans provide tax advantages. They are tax-deferred financial instruments, which means you do not have to pay taxes on the income generated by the account. You will only be required to pay taxes once you begin withdrawing funds beyond the age of 59 1/2. For small firms that established SARSEP accounts before 1996, such retirement funds may be less expensive to manage than a standard [401(k)](https://www.carboncollectiveinvesting.com/sustainable-investing/401k-plan) or a SIMPLE IRA, as the cost to open a SARSEP account was nearly nothing in 1991, but 401(k)s cost $5,000 and above. SARSEPS are flexible. Employers can tailor their contributions to employees based on each worker's salary and years of service. ## **Disadvantages of SARSEP Plans** The disadvantages of a SARSEP include the following: The most significant disadvantage of a SARSEP is that employers can only use it with 25 or fewer employees. If your business has more than 25 employees, you will not be able to set up a SARSEP. Another disadvantage of a SARSEP is that it is a bit more complicated to set up and maintain than other retirement plans, such as a SIMPLE IRA. This is because a SARSEP must be established as a profit-sharing plan, which means there are more rules and regulations that need to be followed. ![Advantages_and_Disadvantages_of_SARSEP_Plans_(revised)](https://www.carboncollectiveinvesting.com/hs-fs/hubfs/Advantages_and_Disadvantages_of_SARSEP_Plans_(revised).png?width=1920&height=1080&name=Advantages_and_Disadvantages_of_SARSEP_Plans_(revised).png) ## **Key Takeaways** SARSEP is a retirement savings plan that allows small businesses with 25 or fewer employees to make contributions on behalf of their workers. SARSEP plans offer tax advantages but are more complicated to set up than other retirement savings plans. [![FREE PLAN CHECK-UP Meet with an Expert   ✅ Cost-Savings Analysis ✅ Proactive Compliance/Legal Risk Screening ✅ Performance Benchmarking ✅ Sustainable Investment Review ✅ Participant Experience Evaluation    ](https://hubspot-no-cache-na2-prod.s3.amazonaws.com/cta/default/20345524/interactive-127749612835.png)](https://www.carboncollectiveinvesting.com/hs/cta/wi/redirect?encryptedPayload=AVxigLLelL9wGqWFOe8VsVHlMp5UQNYu99cpGddtZBoOsPYtFeF%2Fvq%2BklYnBtBCEyijUEfIDXdZ5TTbnkruLwigzKJMOlKOASfRBxNg49g%2BrPsHqhEFgX9IJQFDAEBiw%2FTFWNXkiqB8nLXkohO0oJjojx54NhFYwosOed1qjlxqj669BjJJXSgBOV%2B%2F63KGoBB8p&webInteractiveContentId=127749612835&portalId=20345524) ## **FAQs** ### **1. What is a SARSEP?** It is a retirement savings plan that allows small businesses with 25 or fewer employees to make contributions on behalf of their workers. ### **2. What are the benefits of a SARSEP?** SARSEP plans provide tax advantages. They are tax-deferred financial instruments, which means you do not have to pay taxes on the income generated by the account. You are only required to pay taxes once you begin withdrawing money beyond the age of 59 1/2. ### **3. What are the disadvantages of a SARSEP?** The most significant disadvantage of a SARSEP is that employers can only use it with 25 or fewer employees. A SARSEP cannot be set up if your company has more than 25 employees. ### **4. How do I set up a SARSEP?** SARSEP accounts must be established as a profit-sharing plan, which means more rules and regulations must be followed. You must work with a financial institution to set up the account. ### **5. How do I terminate a SARSEP?** To end a SARSEP, tell the SARSEP financial institution that you will no longer be contributing and that you wish to end your contract or agreement. You must also advise your staff that the SARSEP has been stopped. ### Related Topics - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing/) - [Carbon Footprint](https://www.carboncollective.co/sustainable-investing/carbon-footprint) - [Energy Efficiency](https://www.carboncollective.co/sustainable-investing/energy-efficiency) - [Greenhouse Gases](https://www.carboncollective.co/sustainable-investing/greenhouse-gases) - [Net Zero](https://www.carboncollective.co/sustainable-investing/net-zero) - [Renewable Energy Sources](https://www.carboncollective.co/sustainable-investing/renewable-energy-sources) - [Sustainable Development Goals (SDGs)](https://www.carboncollective.co/sustainable-investing/sustainable-development-goals-sdgs) ![Attend Our Next Webinar](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-webinar.12af7b6e.svg) ### Attend Our Next Webinar Join our next Sustainable Investing 101 webinar, get our favorite DIY options, and walk through how we build our portfolios. [Watch Now](https://www.carboncollective.co/sustainable-investing-webinar-green-retirement-month) ![Get Our Newsletter](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-demo.6ed28722.svg) ### Get Our Newsletter Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account. Join Newsletter ![close-typeform](data:image/gif;base64,R0lGODlhEQARAIAAAODn7P///yH5BAEHAAEALAAAAAARABEAAAIqBIKpab3v3EMyVHWtWZluf0za0XFNKDJfCq5i5JpomdUxqKLQVmInqyoAADs=) ![Talk To A Human](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-chat.49d48c5b.svg) ### Talk To A Human Joining a new investment service can be intimidating. We’re here for you. Click below to email us a question or book a quick call. [Ask a Question](https://ask.carboncollective.co/f70pooobq) - Portfolios - [Performance](https://www.carboncollectiveinvesting.com/returns) - About - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - Learn - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - Contact - [Contact us](mailto:hello@carboncollective.co) - [Legal](https://www.carboncollective.co/legal) - [Privacy Policy](https://www.carboncollectiveinvesting.com/hubfs/2022-11%20Carbon%20Collective%20Privacy%20Policy.pdf) - [Back to top](https://www.carboncollectiveinvesting.com/401k/salary-reduction-simplified-employee-pension-sarsep-plan#top-of-page) DISCLAIMERS: Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective"), an SEC-registered investment adviser. A copy of Carbon Collective's current written disclosure statement discussing Carbon Collective’s business operations, services, and fees is available at the SEC’s investment adviser public information website – [www.adviserinfo.sec.gov](https://adviserinfo.sec.gov/firm/summary/310129) or [our legal documents here](https://blog.carboncollective.co/legal-documents/). The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. Carbon Collective does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Carbon Collective’s web site or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Investments in securities: Not FDIC Insured • No Bank Guarantee • May Lose Value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Carbon Collective's charges and expenses. Carbon Collective's internet-based advisory services are designed to assist clients in achieving discrete financial goals. They are not intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation and do not incorporate specific investments that clients hold elsewhere. For more details, see our Form CRS, Form ADV Part 2 and other disclosures. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Carbon Collective is not registered. © 2026 Carbon Collective Corporation. All rights reserved. × #### Fact Checked Carbon Collective partners with financial and climate experts to ensure the accuracy of our content. Our team of reviewers are established professionals with years of experience in areas of personal finance and climate. They have contributed to top tier financial publications, such as Reuters, Axios, Ag Funder News, Bloomberg, Marketwatch, Yahoo! Finance, and many others. This team of experts helps Carbon Collective maintain the highest level of accuracy and professionalism possible. × #### Why Trust Carbon Collective Carbon Collective is the first online investment advisor 100% focused on solving climate change. We believe that sustainable investing is not just an important climate solution, but a smart way to invest. We follow ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Much of our research comes from leading organizations in the climate space, such as Project Drawdown and the International Energy Agency (IEA). Our goal is to deliver the most understandable and comprehensive explanations of climate and finance topics. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others. We strive to empower readers with the most factual and reliable climate finance information possible to help them make informed decisions. } ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "Zach Stein", "url" : "https://www.carboncollectiveinvesting.com/401k/author/zach-stein" }, "dateModified" : "2023-08-07T13:11:44.160Z", "datePublished" : "2022-12-13T09:59:57.000Z", "headline" : "Salary Reduction Simplified Employee Pension (SARSEP) Plan", "image" : [ "https://www.carboncollectiveinvesting.com/hubfs/Salary_Reduction_Simplified_Employee_Pension_(SARSEP)_Plan_-_FI.png" ], "mainEntityOfPage" : { "@id" : "https://www.carboncollectiveinvesting.com/401k/salary-reduction-simplified-employee-pension-sarsep-plan", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://www.carboncollectiveinvesting.com/hubfs/CarbonCollectiveLogo.png" }, "name" : "Carbon Collective" } } ``` ```json { "@context" : "https://schema.org", "@type" : "Organization", "alternateName" : "Carbon Collective", "contactPoint" : { "@type" : "ContactPoint", "areaServed" : "US", "availableLanguage" : "en", "contactType" : "customer service", "telephone" : "(650) 868-2697" }, "logo" : "https://www.carboncollective.co/hubfs/CarbonCollectiveLogo.png", "name" : "Carbon Collective Investing LLC", "sameAs" : [ "https://www.facebook.com/carboncollectiveinvesting/", "https://twitter.com/carbncollective", "https://www.instagram.com/carbon.collective/", "https://www.youtube.com/channel/UC769Y-F-L_B37kyQfdpvyXA", "https://www.linkedin.com/company/carbon-collective/", "https://www.crunchbase.com/organization/carbon-collective", "https://adviserinfo.sec.gov/firm/summary/310129", "https://www.wikidata.org/wiki/Q110243690" ], "url" : "https://www.carboncollective.co/" } ``` ```json { "@context": "https://schema.org", "@type": "BlogPosting", "mainEntityOfPage": { "@type": "WebPage", "@id": "https://www.carboncollectiveinvesting.com/401k/salary-reduction-simplified-employee-pension-sarsep-plan" }, "headline": "Salary Reduction Simplified Employee Pension (SARSEP) Plan", "description": "Learn about what a SARSEP is, its requirements, contribution limits, advantages, disadvantages, the plan termination procedure, and who can participate. ", "image": "https://20345524.fs1.hubspotusercontent-na1.net/hubfs/20345524/Salary_Reduction_Simplified_Employee_Pension_%28SARSEP%29_Plan_-_FI.png", "author": { "@type": "Person", "name": "https://f.hubspotusercontent20.net/hubfs/20345524/zach-stein.jpeg", "url": "https://www.carboncollectiveinvesting.com/401k/author/zach-stein" }, "publisher": { "@type": "Organization", "name": "Carbon Collective", "logo": { "@type": "ImageObject", "url": "https://www.carboncollective.co/hubfs/CarbonCollectiveLogo.png" } }, "datePublished": "2022-12-13", "dateModified": "2024-10-01" } ```